Analysis: Shale gas redraws emerging market investment map

A drilling rig is seen at sunset at Grabowiec 6 near the village of Lesniowice, southeast Poland, home to U.S. giant Chevron's first shale gas well in the country, November 28, 2011.Kacper Pempel

LONDON (Reuters) - Shale gas reserves are changing the way fund managers view emerging markets, with countries from Poland and Mexico to global market giant China all gaining in investment appeal.

While controversy rages over the environmental impact of 'fracking', the method used to extract shale gas, exploring these reserves could nevertheless give sluggish global growth a much-needed boost.

By some estimates, shale gas production could add a quarter percent to the annual gross domestic product of the United States for example, one of the largest and most advanced of shale gas producers.

Many emerging economies also have shale gas reserves and could benefit in GDP and balance of payments terms from gas production and the lower energy costs and greater self-sufficiency it brings.

These range from Poland and Romania in central Europe, through Mexico and Argentina, to China, which may have the largest reserves in the world. Improvements in growth prospects, which are in many cases less rosy than a year or two ago, are also likely to attract more portfolio investors.

"It could be a major game-changer," said Simon Quijano-Evans, central and eastern Europe economist at ING.

"It supports the fiscal backdrop in these countries and supports the investment story."

Investors are being swayed by some startling numbers released about U.S. shale gas production in the past few weeks.

Partly thanks to these reserves, the U.S. will become almost self-sufficient in oil by 2035 and will overtake Russia in gas production by 2015 and Saudi Arabia in oil production by 2017, the International Energy Agency said last month.

Investors and policymakers are hoping for similar impacts in other markets. The U.S. Energy Information Administration estimates that emerging Europe's Romania, Bulgaria and Hungary could have more shale gas than Europe's annual consumption and enough to cover Romania's own for almost 40 years.

"The talk about this has exploded in the past 1-2 months, based on the positive U.S. experience," said Quijano-Evans.

DIVIDING LINE

Investors often divide emerging market countries into commodity producers, such as Brazil and Russia, and commodity consumers, such as India and China.

Shale gas could redraw those lines, with China for example, the top importer of commodities, becoming a net energy producer.

Others that stand to benefit include Mexico, which has the fourth-largest reserves in the world, the IEA says. Mexico is already the world's seventh-largest oil producer and a popular investment focus this year, outstripping Brazil.

"There is a great shale story coming through - this is a North American story, not just the U.S.," said Ewen Cameron Watt, chief strategist at the Blackrock Investment Institute, adding that Mexico and Canada have also been beneficiaries of major shale-related investments announced into North America.

So far, cheaper energy has largely only benefited the United States itself, but a U.S. government-sponsored report last week endorsed the expansion of gas exports.

That could cut energy costs more broadly, helping energy-importing countries like Turkey which does not have shale gas reserves and buys in almost all of its energy needs.

"Turkey can be one of the major beneficiaries, together with India, of a potential decrease in energy costs driven by the shale gas revolution," said Giordano Lombardo, chief investment officer of Pioneer Investments, who has Turkey as one of his favored investment plays for next year.

Investing in extracting shale gas and oil has longer rather than shorter-term benefits. Ratings agency Fitch said in a statement last month that Poland will not get a large drop in gas prices from its shale production until 2020.

But even while shale-rich economies take the slow path to profitable extraction, they can also benefit indirectly: Their fiscal positions can improve because of the increased tax take from shale gas production companies, and current account positions may improve because of the inward investment.

FRACKING COSTS

Oil-producing emerging economies like Russia, Kazakhstan or Saudi Arabia are likely to lose out if energy prices do fall.

Opinions vary, however, as to whether shale gas and oil will lower or raise the price of oil, as some analysts say the likely impact from shale is being exaggerated.

Emerging market currencies may also come unstuck from an expected increase in dollar demand fuelled by the U.S. energy boom.

Shale gas proponents have also been struggling to overcome environmental objections to fracking, which involves injecting water and chemicals at high pressure into underground rock formations.

In Romania, campaigners protested ahead of elections last weekend demanding a nationwide ban.

And for China, which is believed to hold the world's largest reserves of shale gas, the process is likely to be a slow one.

"They are going to be 3-5 years away from any effective reasonably large exploitation, simply because they've not done so much so far, it's in the longer term," said Blackrock's Cameron Watt.